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Supply Business
Formerly CPO Agenda

Social responsibility

Weeding out exploitation

Summer 2011

Can you be sure that your sourcing does not exploit workers in your supply chain? More vigilance will not only protect those involved, but also benefit your organisation’s brand.

By Dan Viederman


No multinational in the world seeks out suppliers who will exploit workers. Yet poor working conditions are common in factories and on farms that supply large organisations in virtually all industries in Europe and the US.

Good purchasing and procurement decisions are essential to avoid these illegal, unethical and unsustainable practices. Significant positive change – for vulnerable workers, for brands and for their employers – can result from small actions taken at the top by those who control the purse strings.

What does this “positive change” look like, when we are talking about working conditions rather than product attributes? One often-used – and rather dry – term is “social compliance”, which means adherence to the social standards that are generally included in contracts between buyers and their suppliers. More concretely, good performance means:

• No children in the workplace
• No one forced to work against his or her will
• No one facing dangerous working conditions
• No verbal, physical or sexual harassment
• No workers fired because they advocated for themselves
• No illegal subcontracting.

Socially responsible sourcing carries multiple benefits. Brands avoid negative publicity and strengthen their ability to attract employees as a result of a reputation for ethical performance.

Supplier workplaces are generally more productive and better run, so they can deliver socially responsible working conditions and other business outcomes. For workers, many of whom are poor, the impact can be transformative. A good workplace will provide them with more income, which they will use to send children to school; get better healthcare; provide better food; and maybe even save to set up a small business.

In this sense, positive purchasing practices support the best outcomes of international commerce: increases in wealth and welfare for people worldwide.

Beyond “why” responsible sourcing is a good thing lies the question of “how” it can be done. What are the ways in which sourcing and procurement decisions can disadvantage workers and what
lessons can be learned to protect workers and brands?

Sustained change requires three keys:

• Honestly assessing the presence of poor working conditions, and their causes, in part by engaging with workers
• Incentivising good social performance
• Integrating social responsibility into all business processes, including product design.

Procurement managers must not underestimate the likelihood that their supply base carries substantial risks. While these are most salient in the production of raw materials, they are common in manufacturing, construction, fast-moving consumer goods and even public sector procurement.

Verité is an independent, non-profit organisation which monitors international labour rights abuses in offshore production sites. Three examples of the organisation’s work with employers and brands illustrate how exploitation can happen as an unanticipated consequence of the actions taken by procurement and purchasing staff.

Case 1: You can’t move Christmas

Companies often inadvertently cause social compliance problems during product design and contracting.

Verité worked with one global consumer products company to understand the process of sourcing a Christmas gift item in China. In this case, purchasing decisions at the global headquarters caused excessive overtime and also unauthorised subcontracting.

Looking to sell something new and different, the company engaged a multifunctional process to design and engineer an innovative item. The purchaser got buy-in from the creative department, category managers, merchandising, logistics, quality and engineering, and company executives. This process posed challenges to the approval process for the structure, colour, texture and graphics of the product. Some comments coming back to buyers were vague – “too whimsical” or “not blue enough” – leaving the interpretation and execution to the buyer and creative department.

The resulting dialogue aimed to get as close as possible to a product that was “appropriately whimsical” or “blue enough”. But engineering needed to change each time the product was tweaked. For each new design, the creative and quality teams had to work through potential quality risks, some of which became visible only during actual production. In the meantime, final approval of specifications for manufacturing were pushed back beyond a reasonable timeline.

This sequence of events led to mid-order production changes in specs and delayed or missed approval dates. During the 13-month design and sourcing process that Verité examined, the quantity of goods to be produced varied substantially – between 25,000 and 300,000 – as the company tried to forecast demand. The materials to be used also changed six times as the company honed the perfect design. The combination of frequently revised product specifications and fluctuating demand meant multiple and often conflicting messages to the factory.

As a Christmas item, the delivery had an immovable deadline. This was not the only aspect of the work that was fixed – so were prices and ethical requirements. With last minute changes to the product, the factory had to do more in a shorter time with the same amount of resources and was also constrained by the company code of conduct.

In Verité’s experience, such conflicting fixed constraints drive a range of unacceptable outcomes. Workers can be forced into excessive or unpaid overtime; supervisors may resort to verbal and physical abuse of workers to produce greater output; unsafe conditions may result as corners are cut to save money, or as a result of limited time available to undertake safe work.

Alternatively, the factory may, instead of resorting to overtime, hire new workers on a temporary basis – workers who, as a result, are less likely to receive legally required benefits. Or the factory may subcontract to an external facility with excess capacity and unproven ability to deliver social responsibility. In extreme cases, factories have resorted to meeting new demand and shortened timelines by hiring the most pliable and flexible workers – children. If a buyer’s ethical standards require that overtime be strictly limited, but the production schedule requires overtime, the supplier may simply hide the extra work hours from the buyer.

It is possible that changes in forecast demand will result in reduced orders by the buyer. Workers in this case will be fired to bring capacity back in line with production requirements, and these workers will likely not receive legally mandated severance benefits.

The overall result of a purchasing process that changed orders and designs frequently was to drive the facility away from meeting ethical standards. We can derive the following lessons for purchasing officers as they manage the procurement of goods:

• Do not change the design or required amount of goods without allowing ample time for the factory to adjust
• Ensure communication between procurement professionals and those responsible for “social” outcomes within the company
• Look for risks in seasonal and promotional products that differ from those in the company’s core
offering, because non-strategic suppliers are less likely to understand, and be able to deliver, the company’s ethical requirements
• Understand the factory’s capacity compared with your demand, using a capacity assessment.

Case 2: If you can’t prove it is a good place, it might be a very bad place

Poor working conditions are rife in sub-tier suppliers and in raw material production.

Verité conducted a “social assessment” for one of the pioneers in the social responsibility sector – a global company that sells fast-moving consumer goods in stores around the world. This company decided to take the opportunity to look deeper into its supply chain, in a geographic location where our experience indicated high risks. Verité visited a Malaysian workshop where flooring and countertops were fabricated for the company’s Asian stores.

What we found shocked even the most experienced assessors among us: Nepalese, Burmese and Bangladeshi migrants were paid only once every three months. The workers we interviewed – in their local languages – reported that they were regularly harassed verbally, but they dared not to report it for fear of losing their jobs. They lived in shipping containers that had been converted to living areas, which suffered from water leaks, poor sanitation and excessively high temperatures. The workers’ movements were restricted due to gates that were locked at night and the presence of a guard dog in the courtyard. One worker was injured when a piece of stone fell on him and he had been unable to work, but was told that to return to his home country he would have to buy his own plane ticket, in contrast to the agreement made when he arrived in Malaysia. These conditions can be classified as forced labour.

Beyond the risks to workers and to the company’s reputation, this situation is troublesome because it was so easily avoidable. Suppliers of similar materials in the same geographic area could have provided working conditions much closer to the company’s ethical standards. Yet at some point, a procurement officer decided to source from this workplace.

Without looking for “good” suppliers, procurement managers will not find them. Without incentives for good social performance, CPOs won’t incorporate it in their selection criteria. The result can be terrible conditions within a company’s supply chain, with serious reputational risks.

The lessons are:

• Non-traditional procurement – in this case building materials – is a place where risks are high
• Sub-tier suppliers – suppliers to your suppliers – are a source of great risk
• Actively seek suppliers who can deliver socially responsible conditions while you also consider quality, price and capacity. You can do this by assessing their management capacity, using Verité’s systems approach to social responsibility
• Provide incentives for procurement staff to find suppliers who can deliver socially responsible working conditions.

Case 3: Human resources procurement carries risks to workers and brands

Procurement of staff is an area rampant with abuse.

Verité has worked with US and European companies to assess working conditions among their own operations and among top-tier suppliers in East Asia.

Our focus is where the workforce is foreign: Filipinos, Chinese, Vietnamese, Indians, Bangladeshis, Burmese, Thais and Indonesians who have paid thousands of dollars to recruitment agencies to get overseas jobs. The workers borrow money to pay these fees, often at high interest. We have detailed this problem in reports posted as part of our campaign at www.verite.org/HelpWanted

Verité has documented this problem since our first social audits among foreign contract workers a decade ago. High debt makes workers vulnerable to a wide range of ethical problems: excessive overtime  – which they need in order to pay back the money they owe; poor health and safety conditions and verbal and physical abuse – workers can’t complain, or fight back against supervisors or factory managers; withheld passports and severely restricted movement – factories can be penalised if workers “run away”, so they keep workers’ documents; and financial fraud – where brokers continue to deduct pay from workers “out of sight” of the employers through direct access to workers’ bank accounts.

This is a problem not simply among suppliers. It is also present in many companies’ direct operations. With Verité’s help, one electronics firm identified the problem in its Singapore facility, driven by that nation’s requirement for a bond of  S$5,000 to be posted for each foreign worker. The problem is virtually unavoidable among construction companies that operate in Asia and the Middle East. Verité has also uncovered similar violations driven by debt-bondage among farmers in the US. The debt faced by vulnerable foreign workers drives them into situations akin to modern-day slavery.

Standard social audits do not uncover the vulnerability faced by these migrants. Verité undertook detailed investigations in workers’ languages to learn about the problems they faced. When we discovered that workers had paid excessive fees to a broker for job placement, we consulted with the company to create a plan that required the broker and, in some cases the supplier, to return fees to the workers, and we trained factory human resources staff on how to undertake ethical recruitment.

In the most effective instances, the company’s procurement staff actively supported the communication of this ethical requirement to facility managers and to suppliers. Unless the business stands behind the ethical standard, and implicitly links continued business to the achievement of social goals, it is unlikely that facility managers and suppliers would have agreed to reimburse the workers.

These are the lessons for purchasers:

• Procurement of human resources is a source of well-documented human rights problems
• The business has to stand behind the ethical requirement or it won’t be resolved
• Improving conditions for foreign workers requires dedicated attention, but results in financial benefits for workers that cannot be overstated
• Ensure that you adopt specific, proven approaches to gathering information from migrant workers by, for example, working with an NGO or specialist auditing organisation.

Practical steps for action

Procurement holds the keys to effective delivery of supply chain social responsibility. As well as the lessons above, there are some over-arching steps that procurement and purchasing staff should take:

• Start by recognising that social responsibility has an equal share of your company’s legal obligation and reputation as do quality, price and delivery.

• Ensure that your company operates with good-quality information about your sourcing profile. Does your company choose prospective facilities in part on the basis of the facility’s ability to deliver social responsibility outcomes? On what is your confidence based? Have workers themselves been interviewed?

• Ensure that sourcing staff understand the social responsibility impact of their actions through training or review of case studies. Without specific exposure to these issues, it is unreasonable to expect that procurement staff have any understanding or ability to act

• Ensure your selected supplier facilities can deliver “responsibility” over time. One way to do this is to implement a social responsibility management system. Verité trains facilities to integrate
responsible practices in its core business processes, including recruitment selection and hiring, and the facilities’ own procurement – avoiding the Malaysia example situation.

• Ensure sourcing staff receive tangible benefits to source from facilities that can demonstrate responsibility. Only a very few companies have provided financial incentives for procurement staff to source responsibly, but this is an obvious and overlooked driver of good performance.

• Ensure that wherever workers are hired through staffing agencies or labour brokers, you address the risks through assessments, tools, policy changes and training, as described in Verité’s Toolkit, available at www.verite.org/HelpWanted

Taking steps to improve the social responsibility of the procurement process leads to improved conditions for workers and less risk for companies. 

Dan Viederman is CEO of Verité, whose mission is to ensure people around the world work under safe, fair and legal conditions. For more information, go to www.verite.org
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